When surviving trustors try to change irrevocable sub-trusts

Recently, I was approached by a client regarding whether he should pursue a claim against the successor trustee of his parents' trust. The surviving trustor (his mother) had amended the trust before she died. The trustee provided a copy of the amended trust showing that my client was not a beneficiary. The client had consulted with several other attorneys, and they all said it was "not worth" pursuing a claim because it would be difficult to prove undue influence or incapacity of the surviving spouse.

After obtaining a copy of the original trust, I learned that my client had a significant stake in the irrevocable portion of an A/B trust that his mother had improperly amended after his father died. A substantial recovery ensued.

In the course of my career, I have observed many parties, and even some attorneys, who are simply not aware of the nuances of trust law entitling them or their clients to a return of assets to an irrevocable sub-trust after a surviving spouse improperly restates or reallocates a trust to exclude them.     

IRREVOCABILITY OF THE DECEASED SPOUSE'S SUB-TRUST

In California, revocable or intervivos trusts become irrevocable upon the death of the settlor/trustor. (Starr v. Ashbrook (2023) 87 Cal.App.5th 999, 1015.) However, when a trust involves more than one settlor, the arrangement is more complicated. For example, estate planners advising married couples have many options for structuring trusts for tax or control purposes, including creating an irrevocable share upon the death of the first spouse.

"When a [revocable] trust is created by joint settlors, a portion of the trust usually becomes irrevocable on the first settlor's death, with the balance typically remaining revocable during the lifetime of the surviving settlor." (26 California Legal Forms - Transaction Guide § 70.10[1].) Upon the death of the first spouse, these trusts often provide that two or three sub-trusts are created: one for the surviving spouse's share (often called the Survivor's trust), one for the deceased spouse's share (often called the Decedent's or Bypass trust), and one for the minimum dollar amount necessary to reduce or eliminate federal estate or gift taxes upon the death of the first spouse (often called a Marital Deduction trust or QTIP). This three sub-trust arrangement is often referred to as an A/B/C trust.

If there is no need for any money to be set aside to avoid federal estate taxes, the Marital Deduction trust may lapse, and the remaining arrangement is often called an A/B trust. This typically involves an allocation of 50% of original trust funds into each of the Survivor's, or "A" trust, and the Decedent's, or "B" trust, representing an equal allocation of the community property contributed by each spouse.

Only the Survivor's trust typically remains revocable by the surviving trustor. The terms of the other sub-trust(s) become irrevocable, with some exceptions for powers of appointment or the surviving spouse's living needs, etc. (see Probate Code §15401(b)(2)), and the surviving trustor/trustee has an obligation to properly allocate and administer the assets assigned to those sub-trusts after the first spouse's death.

IMPROPER ACTIONS BY THE SURVIVING SPOUSE

Although the surviving spouse can legally amend, revoke, or restate only the Survivor's trust portion of the original trust, surviving spouses often fail to recognize or administer the various sub-trusts, or they improperly attempt to amend or evade the provisions of the irrevocable "B" trust. If not adequately advised by a competent attorney, they may honestly believe that they can ignore the separate operation of the sub-trusts or that they can amend or restate the terms of the entire original trust. In reality, they can only amend the terms of the revocable Survivor's trust.

Improper attempts to transfer or deed assets belonging to the irrevocable Decedent's, or B trust, are void and subject to being returned to the B trust, even many years after an improper transfer. This can happen in a number of ways, such as:  (a) improper amendment of the irrevocable sub-trust by purporting to restate the entire original trust; (b) improperly transferring or deeding assets, in whole or in part, out of the irrevocable sub-trust; or (c) reallocating assets from an irrevocable sub-trust in a way that disadvantages the beneficiaries of the irrevocable sub-trust.

For example, in Penny v. Wilson (2004) 123 Cal.App.4th 596, the Court of Appeal held that, where the trustee is not given a general power of appointment, the surviving trustor/trustee did not have power to invade the decedent's sub-trust, and "only half of the value of [the transferred] assets should have been attributed to the survivor's trust, and the remainder attributed to the decedent's trust." (Id. at 606.)  

The surviving spouse in Penny had attempted to evade this restriction by unequally allocating assets between the survivor's sub-trust and the decedent's sub-trust. The successor trustee argued that the surviving spouse did not act in bad faith in doing so. That did not matter. Since the allocation was not equal in value, the successor trustee "did not act impartially toward the beneficiaries" and did not fulfill the purpose of the trust to distribute the estate equally. Therefore, the misallocation and transfers were invalid. (123 Cal.App.4th at 604-607.)

Likewise, a trust which becomes irrevocable on the death of the first spouse cannot be "revoked" by means of withdrawing the surviving spouse's property. See, e.g., Aguilar v. Aguilar (2008) 168 Cal.App.4th 35, 40; Heaps v. Heaps (2004) 124 Cal.App.4th 286 (transferring assets to another trust after death of first spouse was conversion of assets of irrevocable trust).  

CONCLUSION

Attorneys must carefully review the relevant trust documents before advising their clients regarding amending a joint trust or transferring or allocating assets after the death of the first spouse. Failure to do so can lead to avoidable lawsuits against the attorney's clients and/or the attorneys themselves.